Chapter 1

The
Information
System: An
Accountant’s
Perspective

1
 Objectives for Chapter 1
 Primary information flows within the business environment
 Accounting information systems and management information systems
 Information and data
 Three fundamental objectives of all information systems
 The general model for information systems
 Financial transactions from non-financial transactions
 The functional areas of a business
 Independence between accounting and other business areas
 The centralized and distributed approaches to data processing
 Two main stages in the evolution of information systems
 Three roles of accountants in an information system

2
 Internal & External
Flows of Information

Top Stakeholders
Management

Middle
Management

Pe
t i o at i on

rf
or m
Operations
ns
nst Inform

an
Management

ce
ruc

Inf
an dget

orm
dI
Bu

Operations Personnel Suppliers

atio
Customers

n
Day-to-Day Operations Personnel
Internal Information Flows

 Horizontal flows of information used

primarily at the operations level to capture
transaction and operations data
 Vertical flows of information
 downward flows--instructions, quotas, and
budgets
 upward flows--aggregated transaction and
operations data

4
Information Requirements

 Each user group has unique information

requirements.
 The higher the level of the organization,
the greater the need for more aggregated
information and less need for detail.

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 Information in Business

 Information is a business resource:

 ... needs to be appropriately
managed
 ...is vital to the survival of
contemporary businesses

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 What is Information?

 Information is processed data that is

used to make decisions, resolve
conflicts, and/or reduce uncertainty.

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 What is a System?

 A group of interrelated multiple

components or subsystems that
serve a common purpose
 System or subsystem?
 A system is called a subsystem when it is
viewed as a component of a larger system.
 A subsystem is considered a system when it
is the focus of attention.

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System Decomposition vs.
System Interdependency
 System Decomposition
 the process of dividing the system into
smaller subsystem parts
 System Interdependency
 distinct parts are not self-contained
 they are reliant upon the functioning of the
other parts of the system
 all distinct parts must be functioning or the
system will fail

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Examples of Systems
 Biological
 cell
 human body
 Mechanical
 water heater
 computer
 Others
 solar system
 mathematics
E = mc2
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 What is an Information
System?

 An information system is the set

of formal procedures by which
data are collected, processed into
information, and distributed to
users.

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 Information System Objectives in a
Business Context

 The goal of an information system is to

support
 ...the stewardship function of
management.
 ...management decision making.
 ...the firm’s day-to-day operations.

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 Transactions
 A transaction is a business event.
 Financial transactions
 economic events that affect the assets and equities of the
organization
 e.g., purchase of an airline ticket
 Nonfinancial transactions
 all other events processed by the organization’s
information system
 e.g., an airline reservation--no commitment by the
customer

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 Transactions

Financial

Transactions User
Information
Decisions
Nonfinancial System
Information
Transactions

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 What is Accounting
Information Systems?
 Accounting is an information system which
 identifies, collects, processes, and
communicates economic information about an
entity to a wide variety of people regardless of
the technology
 captures and records the financial effects of
the firm’s transactions
 distributes transaction information to
operations personnel to coordinate many key
tasks

15
 AIS vs. MIS
 Accounting Information Systems (AISs)
process financial (e.g., sale of goods) and
nonfinancial transactions (e.g., addition of newly
approved vendor) that directly affect the
processing of financial transactions.
 Management Information Systems (MISs)
process nonfinancial transactions that are not
normally processed by traditional AISs (e.g.,
tracking customer complaints).

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 AIS vs. MIS?

IS

A IS M IS

G L S /F R S TPS MRS F in a n c e M a r k e tin g P ro d u c tio n HRS D is tr ib u tio n

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AIS vs. MIS: Solutions
 Data Warehousing and Enterprise
Resource Planning (ERP)

AIS MIS AIS MIS

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 AIS Subsystems
 Transaction processing system (TPS)
 supports daily business operations
 General Ledger/ Financial Reporting
System (GL/FRS)
 produces financial statements and reports
 Management Reporting System (MRS)
 produces special-purpose reports for internal
use

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 The General AIS Model
The External Environment

The Information Database

System Management

External Data Data Information External

Data Collection Processing Generation End Users
Sources

Feedback
Internal Internal
Sources of Data End Users
The Business Organization

Feedback
Transforming the Data into
Information

Functions for transforming data into

information according to the general AIS
model:
1. Data Collection
2. Data Processing
3. Data Management
4. Information Generation

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 1. Data Collection

 capturing transaction data

 recording data onto forms
 validating and editing the data

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 2. Data Processing

 classifying
 transcribing
 sorting
 batching
 merging
 calculating
 summarizing
 comparing
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 3. Data Management

 storing
 retrieving
 deleting

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4. Information Generation

 compiling
 arranging
 formatting
 presenting

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 Organizational Structure

 The structure of an organization helps to

allocate
 responsibility
 authority
 accountability
 Segmenting by business function is a very
common method of organizing.

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 Functional Areas
 Inventory/Materials Management
 purchasing, receiving, and storage
 Production
 production planning, quality control, and maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services

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 Accounting Independence

 Information reliability requires accounting

independence:
 Accounting activities must be separate and independent
of the functional areas maintaining resources.
 Accounting supports these functions with information but
does not actively participate.
 Decisions makers in these functions require that such
vital information be supplied by an independent source
to ensure its integrity.

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 The Computer Services
Function
Distributed Data Centralized Data
Most companies fall somewhere
Processing Processing
in between.

Reorganizing the All data processing

computer services is performed by
function into small one or more large
information processing computers housed
units that are distributed at a central site
to end users and that serves users
placed under their control throughout the
organization.

Primary areas:
database administration
data processing
systems development
systems maintenance
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CENTRALIZED COMPUTER
President
SERVICES FUNCTION

VP VP Computer VP VP
Marketing Services Production Finance

Systems Data Base Data

Development Administration Processing

New Systems Systems Data Data Computer Data

Development Maintenance Control Preparation Operations Library

DISTRIBUTED ORGANIZATIONAL
President
STRUCTURE

VP VP VP VP
Marketing Finance Administration Production

Treasurer Controller Manager Manager

Plant X Plant Y

IPU IPU IPU IPU IPU IPU

Potential Advantages of DDP

 Cost reductions in hardware and data

entry tasks
 Improved cost control responsibility
 Improved user satisfaction since
control is closer to the user level
 Backup of data can be improved
through the use of multiple data storage
sites

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Potential Disadvantages of DDP

 Loss of control
 Mismanagement of organization-wide
resources
 Hardware and software incompatibility
 Redundant tasks and data
 Consolidating tasks usually segregated
 Difficulty attracting qualified personnel
 Lack of standards
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 Centralized Databases in an IPU
Environment: CDB vs. DDP

 The data is retained in a central

location.
 Remote IPUs send requests for data.
 Central site services the needs of the
remote IPUs.
 The actual processing of the data is
performed at the remote IPU.

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 The Evolution of IS Models: The Flat-File Model

User 1
Data
Transactions
Program 1
A,B,C
User 2
Transactions
Program 2
X,B,Y
User 3
Transactions
Program 3 L,B,M
 Data Redundancy Problems
 Data Storage - excessive storage costs of paper
documents and/or magnetic form
 Data Updating - changes or additions must be
performed multiple times
 Currency of Information - potential problem of
failing to update all affected files
 Task-Data Dependency - user’s inability to
obtain additional information as needs change
 Data Integration - separate files are difficult to
integrate across multiple users 35
 The Evolution of IS Models: The Database Model

Database
User 1
Transactions
Program 1
A,
User 2
D B,
Transactions B C,
Program 2 M X,
S Y,
User 3 L,
Transactions M
Program 3
 An REA Data Model
Example
R E A
M M M 1
Inventory Line items Sales Party to Sales
M person
M
1
Pays for Made to
Customer
1
M
M Received
1 M Cash from
Increases
Cash Collections M 1 Cashier
Received 34
by
 REA Model
 The REA model is an accounting framework for
modeling an organization’s
 economic resources (the assets of the
organization),
 economic events (phenomena that affect changes
in resources), and
 economic agents (individuals and departments
that participate in an economic event), and
 their interrelationships.
 Entity-relationship diagrams are used to model
these relationships. 38
 Accountants as
Information System Users

 Accountants must be able to clearly

convey their needs to the systems
professionals who design the system.
 The accountant should
actively participate
in systems development
projects to ensure
appropriate systems design.
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 Accountants as System
Designers

 The accounting function is responsible for

the conceptual system, while the
computer function is responsible for the
physical system.
 The conceptual system determines the
nature of the information required, its
sources, its destination, and the
accounting rules that must be applied.
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 Accountants as System
Auditors
 External Auditors
 attest to fairness of financial statements
 assurance service: broader in scope than
traditional attestation audit
 IT Auditors
 evaluate IT, often as part of external audit
 Internal Auditors
 in-house IS and IT appraisal services

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